Affordable Housing in the UK – a Pocket of Opportunity?

With recent events in the UK and uncertainty expected to persist pending the outcome of the Brexit negotiations, there have been mixed views as to whether it is the right time to invest. While some investors adopt a wait-and-see approach, Asian investors, in particular, continue to favour London and the UK.

According to JLL, 28% of investment into the UK Market in 2016 was from Asia Pacific, compared to 17% in 2015. Commercially, CBRE’s figures revealed that there were a record £4.9 billion worth of transactions in Q1 2017, the highest since Q4 2014. Of these, Asian investors accounted for half of the transactions. These include major commercial transactions such as the sale of the “Cheesegrater”, Leadenhall Building, for GBP £1.15 billion to CC Land and the “Walkie Talkie” building for a record GBP £1.3bn to Lee Kum Kee Health Products Group.

Juwai.com, China’s prominent international property portal, reported that the enquiries for UK properties have jumped up 60% year-on-year in April, suggesting a renewal of interest post-Brexit. On the residential development front, Hong Kong developer Far East Consortium was awarded the mandate for the regeneration of the NOMA neighbourhood in Manchester, which will see over 600 homes built across four sites.

UK as a Long-term investment destination

After the Brexit vote, Sterling fell to a 31-year low against the US dollar. For foreign investors, the weakened currency translates to lesser capital outlay, which was previously seen as a barrier to entry. With the UK’s strong economic fundamentals and accelerating inflation, various entities including UBS, Nomura, and BlackRock, believe that Sterling is undervalued. For investors looking to at a medium to long-term investment, it appears that this would be an opportune time to explore entry into the market.

Although various issues such as the potential loss of passporting rights have raised concerns about long-term economic stability, analysts believe the UK Government will try to protect its capital and financial centre in the negotiations with EU. Furthermore, proposed EU regulations in 2018 will also likely to work in London’s favor. According to Savills’ report, in spite of the negotiations, the workforce population in inner London is expected to rise by around 72,000 employees. This will, in turn, put pressure on the residential and office market in the surrounding areas, increasing demand for housing and office space.

Shortage of affordable homes

Source: Savills

Housing shortage in the UK has been a long-standing issue, and this has worsened in the recent years. According to Savills, 64,000 new homes are needed per year to meet demand. Similarly, Knight Frank estimated that on top of the Government’s annual target, an additional 28,000 houses will need to be built annually to meet demand.

While new home builds have reached an all-time high, an estimated 58% of market demand is for homes costing less than £450psf. However, only 15% of the developments in the next five years are within this price range.

With the ongoing affordability squeeze and stamp duty increase, the demand for upper mainstream market could fall further, putting pressure on lower and mid mainstream price bands. The severe undersupply of affordable homes has prompted the Government to implement several measures to boost supply. In particular, there have been measures that aim to encourage small developers to take on more projects. Some of the proposed improvements include simplifying the planning process, encouraging construction innovation through the Accelerated Construction programme and assistance to secure greater access to debt for smaller companies. Support for new home owners through schemes such as the Help to Buy scheme, shared ownership, and starter homes, will also encourage a greater take-up rate.

Given the ready demand and strong government support, there appears to be a pocket of opportunity for small developers to take advantage of current market conditions.

Looking to Greater London

Prime Central London residential has traditionally been the focus of many foreign investors, given its reputation as a commercial hub and large catchment population. However, as residential prices drive Londoners to look for houses outside of London, Greater London has emerged as a destination for investors.

With the Crossrail and government-led regeneration projects in various Boroughs of Greater London has never been more attractive to first time home buyers. Crossrail is set to shorten commute times considerably, consequently increasing the popularity of residential areas along the line, since long commuting times have been identified as a major issue for individuals working in London. As shown in Savills and BCO’s What Workers Want survey, 29% of individuals working in London would like to shorten their travelling time. This is higher than the national level average of 21%. In fact, prior to being operational, Crossrail has already impacted the market. Knight Frank’s latest report indicates that areas with planned Crossrail stations outperformed the wider market by 7% on average. JLL expects prices for houses near the Crossrail to grow by up to 16% by 2020, with an average growth of 7%.

Regeneration schemes have also been announced in the Boroughs of Greater London, boosting the overall appeal of these areas. These projects have received strong Government support for regeneration projects through various funds such Outer London Fund, Mayor’s Regeneration Fund, and the Growing Places Fund. For instance, the Brent Cross regeneration will provide 27,000 jobs, along with new facilities and infrastructure improvement. Similarly, other areas such as Kingston, Croydon, Ealing, Waltham Forest, Enfield and Havering have recently announced their regeneration plans. On top of boosting demand for housing in the respective Boroughs, surrounding areas are likely to benefit as well.

Taking all factors into consideration, affordable housing in Greater London presents developers a unique opportunity to capitalise on the existing demand-supply imbalance. That said, these projects are favourable to smaller developers, and require in-depth knowledge of London for successful execution.

Weighing the risks

Compared to other European cities, the City of London, the fifth of top 20 largest global cities, stands out with its superior city size and population growth. It will likely remain an economic powerhouse and one of the top destinations for corporate and private investors alike. Amid the uncertainty, opportunities can come in many forms.

For investors, the question remains: is the glass half empty or half full?

By |2018-07-03T08:16:33+00:00September 16th, 2017|London Residential|Comments Off on Affordable Housing in the UK – a Pocket of Opportunity?

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